Unemployment Insurance

During the most recent recession, an almost unprecedented number of unemployment insurance (UI) claims were made. Thirty one states and the US Virgin Islands have depleted their own unemployment funds and have therefore borrowed money from the Federal Unemployment Account (FUA) to continue to provide UI benefits. New Jersey is one such state. In this section is a variety of information including background on unemployment insurance, information on how changes will affect employers and employees, and recent legislative changes.

Background
Federal and State Assessments
Impact on Employees and their Families
Impact on Employers
Legislative and Constitutional Updates

Background

In 2009, New Jersey’s Unemployment Insurance Trust Fund became insolvent for several reasons, mostly due to:

• Previous Legislatures and Governors from both parties raided yearly surpluses in the UI Trust Fund to balance the budget.
• Taxes collected by the fund were no longer able to keep pace with record unemployment rates claims.

As a result, New Jersey borrowed money from the federal government in order to pay unemployment recipients. By 2010, NJ had borrowed almost $1 billion and by 2011 that number grew to $1.8 billion. Today, the State has an outstanding balance with the Federal Government at around $1.2 billion.

• New Jerseybegan borrowing from the Federal Unemployment Account in March 2009.
• The New Jersey Department of Labor and Workforce Development periodically makes payments to the loan.
• However, New Jersey continues to borrow, as necessary. Therefore, the exact loan amount for New Jersey fluctuates.

Like other states, over the past 15 years the New Jersey Legislature and several governors diverted monies from UI Trust Fund to support other expenditures. Those diversions, coupled with a downturn in the economy, required the state to borrow from the federal government. As a result:

• The federal government waived interest on state loans through 2010, but recently announced that interest would begin to accrue in January 2011 as a result of the federal budget crisis.
• New Jersey’s first interest payment is due to the federal government on September 30, 2011.
• Several proposals have been introduced in Congress and by President Obama to forgive these interest payments. However, none have been enacted.

Federal Assessments

• In 2009, the federal economic stimulus bill temporarily waived interest payments on the federal loans.

• The waiver expired at the end of 2010. States are now required to make the interest payments on those loans.

• Beginning July 2011, New Jersey employers received a bill for federal loan interest payments.

A 1984 New Jersey law (N.J.S.A. 43:21-14.3) requires that the Department of Labor and Workforce Development assess interest on employers any time there is a federal loan and state funds are not adequate to make interest payments. Therefore, by July of 2011, some New Jersey employers received a bill for federal loan interest payments averaging $23 per employee in order to make payment on the loans.

StateAssessments

State payroll tax contributions are assessed on a quarterly basis to employers and differ from federal.

Under state law, if the UI fund does not have enough money to pay benefits, state payroll taxes on employers increase automatically.

However, in July 2011, a business coalition led by the New Jersey business community averted a $750 million state payroll tax increase to fund UI benefits following the enactment of legislation which modified the employer UI rates (P.L.2011, c.81). Had P.L.2011, c.81 not been passed, employers would have faced an average UI tax increase of $300 per employee this year in addition to the federal assessments.

Now, that increase will be phased in over three years, making this year’s increase a more manageable average of $100 per employee. The state billing for employer UI tax contributions, which reflects this phase-in, is expected to be mailed by the New Jersey Department of Labor and Workforce Development in late July 2011.

Impact on Employees and their Families

• Higher payroll taxes for the State’s employers means less hiring, less job expansion, and potential cutbacks of staff.
• Since employees pay into the fund and expect to get benefits if they lose their job, any instability in the fund balance puts employees and their family at risk of receiving funds if they lose their jobs.
• Low fund balance causes the need for reforms to the UI fund, which may include reducing benefits and adding waiting periods for checks to be issued.

Impact on Employers

What does this mean for employers?

• Beginning in 2012, the federal government will begin charging for the loan principal.

How will they begin charging?

• By reducing employer FUTA (federal unemployment) tax credits.
• Employers normally get a tax credit of 5.4 percent on the FUTA tax rate of 6.2 percent if they pay their taxes on time. However, if a state has an outstanding loan, the federal government collects the principal on the loan by reducing the tax credits received by employers.
• Beginning with the calendar year 2011 tax (which is due in 2012), an added 0.3 percent FUTA payroll tax on the first $7,000 of wages paid to each employee will be assessed on employers to pay off New Jersey’s loan principal.
• This amount will increase by 0.3 percent annually until the principal is paid off.

How much will this cost?

• Together, the FUTA tax and the interest assessment are estimated to cost approximately $44 per employee in 2012.
• The increases are partially offset by the sun setting of a 0.2 percent 35-year-old "temporary" unemployment tax. Eliminating the 0.2 percent FUTA surtax should save employers on average $14 per employee per year.

The FUTA tax credit received by employers will continue to be negatively affected until the federal interest and loan principal are paid off, which is estimated for 2014. The exact timing will depend on a variety of factors including New Jersey’s economic condition, the number of UI claims filed each year, and whether further reforms are made to the UI system.

Frequently Asked Questions

New Jersey’s Constitutional Amendment

In 2010, the New Jersey business community lobbied for a constitutional amendment that would prohibit any further raiding of the UI Fund for purposes other than Unemployment Insurance. The measure passed overwhelmingly by an 80 percent to 20 percent vote.

This new constitutional dedication:

• Protects employers from any unjustified reallocation of moneys that should be dedicated solely for UI benefits.
• May restore solvency in the State’s UI Fund.
• Will help to reduce the burden placed on employers.
• Moved rates from Column B to C – which enacted an increase of only $150/per employee.
• Creates a state UI Task Force to study the issue and enacted several benefit changes including a one week waiting period and revising the rules for collecting unemployment when discharged for misconduct.

The UI Task Force, made up of legislators, appointees from the Governor, business groups, and labor organizations reviewed the NJ Unemployment Insurance system and released their report in early 2011. The report suggests:

1. Phase in the remaining tax increases on employers over a three year period to provide predictability and avoid mass layoffs.

This would mean a $100/per employee tax increase each year for three years, rather than a $300/per employee increase in one lump sum.  

2. Change the “column widths” in the future in order to prevent such large tax increases from taking effect again. 

This formulaic change, coupled with the recently enacted constitutional amendment to prevent the raiding of monies from dedicated sources like the UI Trust Fund, should ensure the health of the Trust Fund in the future.  The UI Task Force also stated they would reconvene in the summer of 2011 to look at further changes to the State’s unemployment system, including possible benefit reductions.

Recent Legislative Changes to Unemployment Insurance

In May 2011, the Legislature approved A-3819/S-2730 that enacts the two recommendations listed above.  The bill was signed into law on June 30 by Governor Christie.

Benefits of the bill A-3819/S-2730:

• Although it is still a tax increase on employers, it is a better alternative than moving from Column C to Column E+10 in Fiscal Year 2012, which would have been a $300/per employee tax increase.
• Gives the State the opportunity to see how the Trust Fund balance looks, and to see what the Federal Government does over the next several years with loan repayment terms.
• Readjusts the column widths in order to make large tax hikes less likely in the future.
• Ensures stability in the UI Trust Fund, which makes employers more secure in their long-range planning.

The Future of Unemployment Insurance

• Depends on the solvency of the New Jersey UI Trust Fund.
• As currently structured, it is expected that on July 1, 2012 (FY 2013) employers will move from Column D to Column E, resulting in another $100/per employee increase.
• On July 1, 2013 (FY 2014), employers will move from Column E to Column E+10%, which will be the final $100/per employee increase.
• Rates will stay at Column E+10% until the fund returns to solvency, then the rates will automatically decrease as employers move back down the column scale.
• Estimates put the UI Trust Fund into positive territory sometime during FY 2017. 

This estimate is subject to the amount of claims being filed and any future reforms which reduce the burden on the Trust Fund.  Employers may see additional changes at both the State and Federal levels.

Updated on July 25, 2011.